Australia: Sealing the settlement: don't forget to invite the third parties

When settling a dispute, it is important to consider
whether the release from liability should extend to third parties
associated with the release, and there are several options open to
do so.

We often talk of sealing the deal, but sealing the settlement of
a dispute is also an important occasion. Closing a deal may open up
new business opportunities, but finalising the settlement of a
dispute can resign a distracting and draining feud to history so
that a business can focus on what matters most, its business.

Often, the final step in sealing a settlement is entering into a
settlement agreement. There are many issues which may arise when
preparing a deed of settlement; for example, the insurance
implications of releasing a person from liability, the tax
treatment of the settlement sum, whether any indemnities are
necessary, and much more. Not all of these issues will arise in
every case, but one issue which almost certainly will is the scope
of the release from liability.

For the party being released from liability
(releasee), it is important to consider whether
the release should extend to its related entities, employees,
officers, contractors and agents (together, the third
parties and separately, a third
party).

Consider the following example. Person A claims that Company B
misled them through misleading statements made by employees of
Company B. If Company B settles with Person A, it should consider a
release from liability that extends to the employees of Company B
who allegedly made the misleading statements. Otherwise, a risk
will remain that a claim will be brought against an employee who
may in turn make a claim for indemnity or contribution against
their employer (Company B).

Key points in settling a claim

There are two questions that a releasee should consider:

which third parties should be released from liability; and

what mechanism should be used for releasing the third
parties?

Third parties may be protected through the use of a deed poll,
creation of a trust, legislation (if available) or simply a
contractual release. Which option is used largely depends on
whether the releasee wishes for the third parties to have a right
independent of the releasee to enforce the release and the
circumstances of the particular case.

Which third parties should be released from
liability?

Which third parties will be released from liability will largely
be determined by two factors:

whether the releasee believes there is a need to protect third
parties; and

the outcome which the releasee is able to negotiate with the
releaser.

The releasee may wish to seek a broad release, such as a release
for its related entities, directors, officers, employees,
contractors and agents, both present and past.

What mechanism should be used for releasing the third
parties from liability?

When determining what mechanism to use to release the third
parties from liability, the releasee must consider whether it
wishes the third parties to have a right to enforce the release
from liability independently of the releasee. If the answer is yes,
the releasee has several options.

First, it could make the third parties
signatories to a deed of settlement. If the third parties are
signatories to the deed of settlement, they are parties to the deed
and may enforce it. If a deed is used to record the terms of
settlement, the requirement that consideration move from the third
parties is dispensed with.

However, making the third parties signatories to the deed of
settlement may be impractical depending on the number of third
parties and their whereabouts. Further, the releasee and the
releaser may not wish to disclose the contents of the settlement
deed to the third parties, which would be difficult to avoid if
they were signatories.

Secondly, the releasee could arrange for the
releaser to execute a deed poll which releases the third parties
from liability. A person for whose benefit a covenant in a deed
poll is expressed may sue upon that covenant, if that person is
sufficiently named in the deed poll. This option overcomes the
shortcomings of having the third parties execute the deed of
settlement.

Finally, the releasee and third parties may
avail themselves of legislation that exists in certain
jurisdictions which modifies the law of privity to allow third
party beneficiaries to enforce an obligation: see section 11 of the
Property Law Act 1969 (WA), section 55 of the Property Law Act 1974
(Qld) and section 56 of the Law of Property Act 2000 (NT).

Whether this legislation applies will to an extent depend on the
choice of law clause used in the deed of settlement. For the
legislation in Queensland and the Northern Territory, a third party
beneficiary is required to communicate their "acceptance"
to the promisor of the promisor's obligation. This must be done
within the time specified by the promise or, if no time is
specified, within a reasonable time of the third party beneficiary
becoming aware of the promise. It is worth noting that the
legislation in Queensland, Western Australia and the Northern
Territory can restrict the ability of a promisor and promisee to
vary their agreement without the consent of any third party
beneficiaries.

Two further options to protect the interests of third
parties

If the options referred to above are unavailable or unacceptable
to the parties, the releasee has two further options to protect the
interests of third parties. These two further options do not allow
the third parties to enforce the release from liability
independently of the releasee.

First, the releasee could include in the deed
of settlement a provision stating that the third parties are
released from liability. The releasee could further add that the
releaser will enter into a deed of settlement with a particular
third party when requested to by the releasee. If this option is
taken, the third parties have no right to enforce the release and
are dependent upon the releasee to protect their interests.

Secondly, a provision could be included in the
deed of settlement that the releasee has sought and obtained the
release as agent of the third parties and holds the release on
trust for their benefit. This option is probably the most common of
those mentioned in this article. For this option, the releasee is a
trustee of a chose in action and the third parties are
beneficiaries. The third parties must initially rely on the
releasee to enforce the release on their behalf, but if the
releasee is unwilling to do so, the third parties may bring
proceedings to enforce it themselves where the releasee is joined
as a co-defendant along with the releasor. In this way, the third
parties are able to protect their own interests if the releasee is
unwilling to do so.

It is worth noting that if the releasee holds the release from
liability on trust, it is assuming obligations as trustee of the
release. The releasee may be called upon to enforce the release
several years after the deed of settlement is entered into,
depending on how long the limitation period is for the
releaser's cause of action. There may also be restrictions upon
the ability of the releasee to vary the terms of the release, if
the third parties have changed their position to their detriment on
the assumption that the release will continue.

Conclusion and summary

When settling a dispute, it is important to consider whether the
release from liability should extend to third parties associated
with the releasee. There are several options open to a releasee to
protect the interests of third parties. The appropriate option will
ultimately depend on the wishes of the releasee, the outcome of the
negotiated settlement, and the particular situation.

Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
Persons listed may not be admitted in all states and
territories.

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